Tech supply chains are still a complete mess
Sweet, okay, we're recording. (claps) So, I'm in New York right now and The Verge officesare basically shut down. We're all working from home, because of the coronavirus outbreak. And while we can still publish remotely, a lot of stuff is just shutting down. - Indoor shopping malls across the state closed last night, until further notice. - 98.8% of our schools have closed down. - 100% of the workforce must stay home. - Right now, the urgent problemis the public health crisis. We need to slow the spread of infections, and filled out hospital capacity. That's what's most important. But behind the public health crisis, there's also a manufacturing gridlock that's gonna cause huge problems for basically every hardware company. It turns out mass producinghardware is really complex, with thousands of moving parts, and almost no stockpile to fall back on, when a disaster like the coronavirus hits. When China went on lockdown in February, it basically stoppedelectronics manufacturing cold. An analyst group called TrendForce estimates that 5.7million laptop computers shipped in February, whichmight sound like a lot, but it's a 48% drop from last year. We're already seeing someof the impact from that. If you need to replace abroken MacBook right now, you could be waiting for awhile. And some analysts are predicting the next round of iPhonescould also be delayed. Manufacturing is just amuch more brittle system than people realize, the result of a hundred yearsof cutthroat competition. But to see how it got that way, you have to look at the big picture. Making a computer or a smart phone is really complex. But, the process itself isreally just an assembly line. This system was pioneered by Henry Ford in the early 20th century. - [Narrator] Everyday, asmany as 80 boxcars of parts arrive at each plant. - Everything has to happenin the exact right order. So, running out of a specific part can stop the whole assemblyline in its tracks. To make sure that didn't happen, Ford arranged his system in batches. Executives would decide atthe beginning of the process how many cars to make. But, batch productioncreated other problems. It was really hard toguess the right batch size so far in advance. And even if the executiveshit the right number, they had to manage hugestock piles of inventory.
Whether it was partswaiting to be assembled, or cars waiting to be sold. (metal banging) After the second world war, Toyota pioneered a new approach that would fix the inventory problem. It was called the ToyotaProduction System, or just-in-time production. It looks decades to perfect, but by the 80's, they were making cars more cheaply than anyone in Detroit. He became the first manufacturer to make 10 million cars a year, all thanks to efficiencyof the new system. Under the Toyota System,production's continuous and inventory is keptto an absolute minimum. Components arrive justin time to be assembled, and the finished productarrives just in time to be sold. It takes a lot of coordinationto make that work. But, if you can do it, you don't need thosehuge warehouses anymore. Which saves a lot ofmoney in the long term. Keeping excess inventory down is particularly importantfor electronics companies. Nobody wants last years camera, or last years processorin this years phone. So, excess componentsare usually just wasted. And the components that change the fastest are often the mostexpensive ones in the phone. When Tim Cook first came to Apple in 1998, his main job was moving the company over to lean, just-in-time manufacturing, keeping inventory costsas low as possible. Fast forward 20 years, and the entire hardwareindustry works that way. But, we know from previous disruptions, that system can be really fragile. - Okay, so remember the March2011 earthquake and tsunami that knocked out the FukushimaDaiichi Nuclear Power Plant? Right, I promise I have a point. As a result of the tsunami, it suddenly became a lot harder to buy cars in certain colors. Here's how that happened. There was a plant nearbythat made a pigment that makes car paint sparkle. It was used by prettymuch every car maker. At the time of the tsunami, it was the only place in theworld that made this pigment. Also, the site of the pigment stockpile. Suddenly, it was really hard to buy cars in certain shades of red and black. In fact, about 20% of Toyota's inventory was affected by this. - Under the just-in-time system, inventories are kept solow that manufacturers don't have anything to fallback on if something goes wrong. If any one of yoursuppliers stops shipping, you have to halt manufacturing until you would find a replacement. That's hard enough for a car, but for something ascomplex as a smartphone, there are thousands of parts and dozens of different suppliers. The supply chain is biggerthan any one company or any one country. Just look at this tear down iFixit did of the Galaxy S20 Ultra. Samsung is a South Korean company, and they make a lot of their own parts.
But, you also have a ton of Qualcomm chips designed in the US andprobably fabbed in China. The Bluetooth module is from Murata, which is based in Japan. The wifi modules built by Qoryo, another US company that'smost likely building in China. That's a really big supply chain, which is a dangerous thing to have if you're in a global pandemic. Any one of those companies might have to shut downbecause of the coronavirus. Either because the factory closes, or the home offices are so messed up that they can't respond to orders. If that happens, Samsung's gonna have a really hard time making this phone. While you might think theyhave a lot of those chips stashed away, just in case, the logic of lean manufacturing and just-in-time production means they probably have less than you think. (light music) At this point, Chinese factories are starting to open up again. But, they're running at half capacity, and it's gonna be a slow process getting them back to full strength. There's also a natural delaybuilt into the product cycle. Apple's new iPad Proseems to be unaffected since those deviceswent through production two months ago. But, anything that was planned for release two months from now isprobably running into trouble. Which is why analysts are so nervous about the next round of iPhones. So, we don't know what will happen. There's still a chance manufacturers will get up to speed in time, but don't be surprised if a lot of the big hardware releases of 2020 end up getting pushed back. - You remember the paintpigment I was telling you about? So, the factory reopened in May, but it took them until September to catch up on their back orders. But the good news is, by 2013, the companythat made the pigment, Merck KGaA, had opened a second factory. So, now there were two. One in Germany and one in Japan. It's not as easy to move theiPhone out of China though. I mean, the iPhonerelies on skilled labor. In 2017, Tim Cook pointed out that there are way moretooling engineers in China than there are in the US. The plain fact of the matter is that there aren't a lot ofplaces that Apple can go. Just-in-time manufacturingis very efficient. But, it's also very fragile. Resilience doesn't show up as clearly on a balance sheet. But in times of crisis, itmight be exactly what we need. - Hey, thanks for watching. Sorry for the shakycamera and the bad sound. We're doing our best. I know it's a little scaryin the world right now, but yeah, take care of yourself. Wash your hands, and trynot to go outside too much and we'll get through this.
Whether it was partswaiting to be assembled, or cars waiting to be sold. (metal banging) After the second world war, Toyota pioneered a new approach that would fix the inventory problem. It was called the ToyotaProduction System, or just-in-time production. It looks decades to perfect, but by the 80's, they were making cars more cheaply than anyone in Detroit. He became the first manufacturer to make 10 million cars a year, all thanks to efficiencyof the new system. Under the Toyota System,production's continuous and inventory is keptto an absolute minimum. Components arrive justin time to be assembled, and the finished productarrives just in time to be sold. It takes a lot of coordinationto make that work. But, if you can do it, you don't need thosehuge warehouses anymore. Which saves a lot ofmoney in the long term. Keeping excess inventory down is particularly importantfor electronics companies. Nobody wants last years camera, or last years processorin this years phone. So, excess componentsare usually just wasted. And the components that change the fastest are often the mostexpensive ones in the phone. When Tim Cook first came to Apple in 1998, his main job was moving the company over to lean, just-in-time manufacturing, keeping inventory costsas low as possible. Fast forward 20 years, and the entire hardwareindustry works that way. But, we know from previous disruptions, that system can be really fragile. - Okay, so remember the March2011 earthquake and tsunami that knocked out the FukushimaDaiichi Nuclear Power Plant? Right, I promise I have a point. As a result of the tsunami, it suddenly became a lot harder to buy cars in certain colors. Here's how that happened. There was a plant nearbythat made a pigment that makes car paint sparkle. It was used by prettymuch every car maker. At the time of the tsunami, it was the only place in theworld that made this pigment. Also, the site of the pigment stockpile. Suddenly, it was really hard to buy cars in certain shades of red and black. In fact, about 20% of Toyota's inventory was affected by this. - Under the just-in-time system, inventories are kept solow that manufacturers don't have anything to fallback on if something goes wrong. If any one of yoursuppliers stops shipping, you have to halt manufacturing until you would find a replacement. That's hard enough for a car, but for something ascomplex as a smartphone, there are thousands of parts and dozens of different suppliers. The supply chain is biggerthan any one company or any one country. Just look at this tear down iFixit did of the Galaxy S20 Ultra. Samsung is a South Korean company, and they make a lot of their own parts.
But, you also have a ton of Qualcomm chips designed in the US andprobably fabbed in China. The Bluetooth module is from Murata, which is based in Japan. The wifi modules built by Qoryo, another US company that'smost likely building in China. That's a really big supply chain, which is a dangerous thing to have if you're in a global pandemic. Any one of those companies might have to shut downbecause of the coronavirus. Either because the factory closes, or the home offices are so messed up that they can't respond to orders. If that happens, Samsung's gonna have a really hard time making this phone. While you might think theyhave a lot of those chips stashed away, just in case, the logic of lean manufacturing and just-in-time production means they probably have less than you think. (light music) At this point, Chinese factories are starting to open up again. But, they're running at half capacity, and it's gonna be a slow process getting them back to full strength. There's also a natural delaybuilt into the product cycle. Apple's new iPad Proseems to be unaffected since those deviceswent through production two months ago. But, anything that was planned for release two months from now isprobably running into trouble. Which is why analysts are so nervous about the next round of iPhones. So, we don't know what will happen. There's still a chance manufacturers will get up to speed in time, but don't be surprised if a lot of the big hardware releases of 2020 end up getting pushed back. - You remember the paintpigment I was telling you about? So, the factory reopened in May, but it took them until September to catch up on their back orders. But the good news is, by 2013, the companythat made the pigment, Merck KGaA, had opened a second factory. So, now there were two. One in Germany and one in Japan. It's not as easy to move theiPhone out of China though. I mean, the iPhonerelies on skilled labor. In 2017, Tim Cook pointed out that there are way moretooling engineers in China than there are in the US. The plain fact of the matter is that there aren't a lot ofplaces that Apple can go. Just-in-time manufacturingis very efficient. But, it's also very fragile. Resilience doesn't show up as clearly on a balance sheet. But in times of crisis, itmight be exactly what we need. - Hey, thanks for watching. Sorry for the shakycamera and the bad sound. We're doing our best. I know it's a little scaryin the world right now, but yeah, take care of yourself. Wash your hands, and trynot to go outside too much and we'll get through this.
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